The Iceland Goeth.
Last year, the United Nations Human Development Index named Iceland the most developed country in the world. This year, like a South American banana republic or African kleptocracy, the North Atlantic island nation has had to turn to the International Monetary Fund for a rescue package--estimated at $6 billion, including contributions from Norway, Sweden, Denmark, and possibly Russia and Japan--to salvage a wrecked currency and shattered banking system. Think things are bad in America under Bush, Paulson, and Bernanke? Just wait. Iceland shows us just how much further we may yet fall.
Iceland's banks didn't bet on the U.S. real estate bubble. But they did depend on easy credit at home and abroad, and as Iceland's currency, the krona, tanked--losing 35 percent of its value against the euro over the past year--the house of IOU's came down. The currency, weak already, collapsed, finally trading at 340 krona to 1 euro. As credit markets tightened around the world, Iceland's banks could not borrow any more foreign currency, and could not do anything with their now worthless national currency. For an island state that must import necessities from abroad, a debased krona and bad credit score meant immediate hardship. And with few native industries, Iceland was in no position to get hard currency through trade.
So Reykjavik has turned to the IMF, which places strict--and often ineffective--controls on the nations that take its money. The crisis jeopardizes Iceland's sovereignty in other ways as well, as the government considers pegging the krona to the euro, and thus to the whims of the European Central Bank, or joining the European Union out of sheer necessity. Financial globalization precipitated the crisis, of course--though the bulk of the blame belongs to central banks and national governments, and not only Iceland's. British Prime Minister Gordon Brown played a particularly shameful role in Iceland's downfall by using some of his recently-acquired anti-terrorism powers to seize the British assets of Iceland's largest bank, Landsbanki.
It's a small globalized world after all, and while the United States may not be as small as Iceland, what happened there can happen here. The future looks cold.